the positive critique

Wojtek Sokolowski sokol at jhu.edu
Thu May 4 07:19:07 PDT 2000


At 04:42 PM 5/3/00 -0400, Justin wrote:
>Brad raises an important question, again, by askinga bout positive
alternative. Doug asserts--I won't say defends, since he offers no argument--the alternative probably preferred by most people on this list, democratic planning. In a recent post that was taken up and then dropped I remarked that Hayek's attack on this alternative has yet to be answered in a plausible way.
>
>I have suggested a different alternative, market socialism--roughly,
public ownership of the means of production, worker self-management in industry, and market competition among production units. This alternative moots the question of how to retain the advantages of markets by keeping them. It shifts the challege back to Brad and other defenders of capitalism to explain to us exactly what it is that capitalists do that is so necessary that we have to let them privately own productive assets. Brad, your turn.

The question you ask is really not about socialims versus capitalism (which is an ideological distinction), but about organization of the economy into units of action (ranging from individuals to large corporations) and the institutionalized interaction among these units (e.g. various forms of competition, cooperation, resource exchange etc.).

Paradoxically, the mainstream economics - perceived as the blueprint for "capitalism" - does not have much to say on that subject. It is so, because a major weakness of the mainstream economic narrative is that it fails to specify its units of analysis - that is, who or what is the actor.

In essence it treats organizations as if they were individuals i.e. competing against each other to maximize their utlity. But since organizations are merely assembly of individuals having diffrent stakes and resources - and the very essence of an organization is that individual actors are prevented from acting rationally in the neoclasscial sense (i.e. maximizing their own utility) - the question thus arises whose utlity organziations serve, how is that utlity defined, do they really maximize it and if so by what means?

Since most economic activities in a modern society are carried out by organizations rather than single individuals, the mainstream economics with its pathetically naive conceptual apparatus does not have much to say about economic behavior - despite all the pretensions of the punditry. This conceptual apparatus is so pathetic that if stripped of its incomprehensible jargon and mathematical mumbo jumbo - it is reduced to a few lines of folk wisdom, such as "a drop in a bucket" (the "theory" of marginal utility translated into English), or "de gustibus non est disputandum" which gracefully summarizes the limits of economic behavioral model.

In sum, the the Emperor of Econmics has no clothes. The primitive intellectual model of utilitarianism is at utter loss to do what we normally expect of science: to predict novel facts, to devise ways of manipulating facts to achive desired results, and to uncover causes of facts beyond human control in a non-circular fashion.

So to address the question of the organization of economy we need to move not only beyond the stale Manichaen imagery of good and evil (socialism/capitalism) but also beyond the pathetically primitive notion of the market and apriori speculations about it.

One good starting point is the transaction cost economics ((TCE) which intriduces the concept of transaction cost - i.e. the cost of acquiring knowledge necessary to make economic decisions,, as well as costs of monitoring and enforcement of the rules of interaction (i.e the cost of the army of lawyers, consultants, negotiators, arbitrators, coordinators and assorted leeches). There is an argument that organizations offer a savings on these transaction costs versus a sole actor in a competitive market - hence the economic advantage of organizations over markets. The bigger the scale of the economy, and the more complex the interactions among actors, the bigger the transaction costs, and thus the greater the economic advantage of large (vertically and horizintally integrated) organizations.

An alternative point of view is that formal organizations (or 'hierarchies' as they are called in the TCE lingo) are neither the only nor the most efficient mechanism of reducing transaction costs - the other one is informal social networks, rules, norms or behavior, expectations (cf. the concept of trust) that do just that.

Moreover, formal organizations (hierarchies) may have transaction costs of its own, such as suboptimal performance of the management due to pursuing their own agendas at the expense of the organizational goals, "groupthink" or cognitive limitations that undermine the chief goal of hierarchy according to TCE - overcoming cost of information gathering, lack of motivation etc.

Of course, the same can be said about informal networks and rules of behavior - they can lubricate doing business or they can be a serios abstance imposing a tremandous transaction cost - as Eastern Eurpean central planning countries had a chance to witness.

This concpetual apparatus can set teh stage for emprical studies of different economic institutions and identifying what they do well and where they fail - which opens the door for cross-national comparisons in this respect (see for example my chapter "Beneath the Veil of Market Rationality: Cognitive Lumping and Splitting in Narratives of Economic development" in _Ideology and the Social Sciences_ forthcoming). Unfortunately, we see very little of that - as teh field is dominated by the Chicago market-schmarket orthodoy telling us that "there is no alternative." Of course, the left - with its millenarian imagery, sectarianism, and idealistic preoccupation with the scripture (aka "Theory") over emprical investigation ("mindless empricism" i.e. inconvenient facts that can be thoroughly refuted by the Theory) - does not offer an alternative to the theology of teh market.

wojtek



More information about the lbo-talk mailing list